In January 2002, CGAP published a “Viewpoint” on the Microfinance Gateway entitled “Water Water Everywhere, but not a Drop to Drink.” The Viewpoint sparked a frank discussion among 78 donor, investors, and MFI representatives. This Donor Brief highlights the key lessons relevant to donor staff that emerged from the original Viewpoint and subsequent discussion.
The overall supply of funds chasing strong microfinance institutions (MFIs) exceeds demand. In Africa alone, CGAP estimates that the available supply over the next three years will exceed absorption capacity by a factor of three to one. But a shortage of available funds is the reality for many promising micro-finance institutions. This apparent anomaly can largely be explained by the ineffectiveness of much of the supply of funds to MFIs, which is often narrowly targeted and poorly structured.
Donors can change this situation focusing on their comparative advantage: take more risk and allow the best MFIs to graduate to more sustainable and commercial funding; invest resources in the more time-consuming business of building institution capacity; improve the legal and policy environment; and raise reporting, performance and transparency standards for the burgeoning industry.